Article written by:
Jeffrey Monsman, JD
Senior Manager, State & Local Tax Services
With the holiday season approaching, it’s time to start thinking about what to get everyone on your shopping list. Chances are the shopping list will include a gift card or two. While gift cards have great utility for the issuer (cash upfront, entices customers to patronize its business), they can be a trap for the unwary on the accounting side of the table. In a perfect world, gift cards are used in full and there are no remaining balances. In reality, gift cards are often lost, forgotten, or partially used, which begs the age-old question: what happens to unused gift card balances?
While there are a number of accounting issues that surround income related to unused gift cards, one often less glamourous area that must be explored is the possibility that they are potentially escheatable as unclaimed property.
In order to determine whether a gift card must be reported as unclaimed property, understanding state escheatment priority rules is paramount. Generally speaking, the unclaimed property laws of the state of the gift card owner’s last known address take first priority. When the last known address is not known, the unclaimed property laws of the state of incorporation of the holder (in this case, the gift card issuer) will control. Most companies do not track detailed data on who purchased the gift card – let alone track it to know who the actual owner is – to understand where the gift card should be escheated. As a result, gift card escheatment will typically default to the state of incorporation of the holder.
The escheatment of gift cards can be broken down into three general categories:
- Fully Exempt – A growing number of states fully exempt gift cards from unclaimed property reporting. Some states will exempt gift cards on the condition that they do not expire or entitle the issuer to any type of maintenance fees due to inactivity.
- Partially Reportable – Understanding that the administration of gift cards is a tedious task and actually knowing the true owner is practically impossible, some states will only require that a percentage of the remaining gift card value be required to be escheated. This reduced escheatment requirement also takes into account the fact that an aged gift card may still be used even after the dormancy period has expired.
- Fully Reportable – Still other states take a narrower view of gift cards, holding them to be funds owed to another person, and require escheatment in full upon the expiration of a specified period.
Once it is determined that gift card liabilities are reportable in a given state, the dormancy period of the gift card must also be considered. That is to say, how long the gift card must be held before it actually becomes escheatable. Of course, there is not a uniform rule on when gift cards should be escheated, so a state-by-state analysis must be performed to determine the proper holding period. For states that require escheatment of gift cards, the dormancy periods generally range between three and five years.
If you discover that your company has a significant aged gift card liability, it may be time to review the balance details and determine whether a potential unclaimed property liability exists. Fortunately, a majority of the states offer voluntary disclosure programs to allow holders to report past liabilities. In exchange for holders coming forward, most states will waive penalties (and in some cases interest) on the funds remitted. Moreover, participating in a voluntary disclosure program will allow holders to start with a fresh slate and the risk of audit becomes remote.
When going through the review process, it is important to understand the nature of the balances to ensure that only the amounts actually due are being remitted. Some states may treat gratuitous gift cards such as promotional giveaways differently if a holder can show that the funds are not actually “owed.” At the end of the day, the most important factor when it comes to gift card balances and potential unclaimed property reporting is to create a review process and know the rules of not only your company’s state of incorporation but also any state where a gift card was issued. This process will allow the issuer to properly track balances and avoid future unclaimed property exposure.
GBQ and its dedicated team of restaurant industry experts standing ready to assist you. To discuss this information in more detail, please contact Jeff Monsman or other members of GBQ’s Restaurant Services team.